The Puzzles of Fairly Fast Growth and Rapid Collapse Under Socialism

The national statistics and international comparisons based on purchasing power parities suggest that the Former Soviet Union (FSU) in the years 1925-75 and Central and Eastern Europe in the years 1945-80 experienced economic growth comparable to that of many market-based economies of similar levels of development. This must be considered a puzzle given the incentive problems, the absence of proper prices, limited competition and resistance to innovation in economies dominated by a state sector. However, this fairly fast growth came suddenly to a halt in the 1980s. This phase of stagnation and limited reform is now followed not by a recovery, but by a phase of surprisingly deep collapse, indeed in some countries a near disintegration. The paper discusses the three phases with the intention of establishing relationships between them and, in this way, of providing a better understanding of each of the two puzzles.The analysis of development is conducted in terms of standard models of international technology transfer, capital accumulation and catching up. This analysis is informed by the consideration of the distinct characteristics of development under socialism. These characteristics relate in part to preferences of the central authorities, embodied in the so-called communist strategy of industrialization, and in part to the implications for innovation and development of the socialist economic system. The standard view of the socialist development was that the short-term interests were sacrificed for the benefit of future generations. The paper aruges that this was true only in the initial phase of development. In the later phase the authorities had switched to an opposite policy, one of sustaining a reasonable pace of improvement for the current generation under an inefficient system at the expense of future generations. The collapse phase came with the exhaustion of the growth reserves offered by the policy. The intergeneration terms of exchange have switched once more, again to work against the interests of the current generation. The paper also discusses the particular causes of the collapse and the prospects of a revival after the transition to a market-based system is advanced.